Take Measures to Combat Inventory Shrink

Inventory shrink is an issue every small business has to deal with, no matter what business you’re in. Somehow, inventory seems to disappear when a physical audit uncovers discrepancies between the physical product on hand and what the system says should be there. This issue stems from several places including administrative errors, employee theft, and customer theft.

I spent time talking with an entrepreneurial retailer Victoria Lyman, owner of Allegro Dance Boutique in Evanston, Illinois whom I met through Dance Retailer News, a trade publication geared that I contribute to that’s geared toward the dance retailer. Lyman found the inventory in a messy state when she purchased the business four years ago. “Everything was manual, there was no computer system, and a complete physical inventory was never done,” she told me.

Lyman first conducted a physical inventory to set a benchmark so she knew where she was starting from. She then set out to implement systems to ensure inventory shrink was minimized as much as possible. She says that administrative errors were one of her biggest issues. In fact, inventory shrink actually increased to 4% after Lyman installed the company’s first computer system. That’s more than double what inventory shrink should be for a retailer. Lyman attributes the shrink number to administrative errors more than anything else, simply because the entire company was manual.

Reducing Administrative Errors

The first step was to ensure that what was ordered from vendors was actually delivered. “We used to take manufacturers at their words when we received shipments. If it’s on the list, the packing slip, it’s in the box. That simply isn’t true. They make mistakes all the time.” So Lyman now has only two people specifically managing inventory, instead of having every employee pitching in and helping out. She also set up an inventory/receiving processing checklist to ensure that mistakes are minimized. That makes it easier to spot issues and rectify them internally since it could only be one of two people who made the mistake.

Lyman still has some way to go in minimizing administrative errors. About fifteen percent of the SKUs she carries don’t have UPC symbols, leaving it open to employee interpretation as to which SKU to ring in. She needs to purchase and learn the software that creates bar codes so the products can be scanned by her POS system’s bar code reader versus relying on manual input by her store staff, which leads to human error.

Reducing Employee Theft

Moving to a larger store presented a number of challenges for Allegro Dance Boutique, as well as opportunities to reduce inventory shrink.

The new 2,200 square foot location required that two sales people always be working, versus the old location which could only have one person working if need be. The large space also required one employee always be on the sales floor. So if one employee was in back searching for a pair of shoes for a customer, the other employee had to be on the sales floor. This employee presence helped mitigate the lack of oversight, one of the biggest reasons people shoplift at a particular store.

Lyman also made the store environment more friendly and customer-centric, which had a secondary impact of discouraging shoplifting. Lyman told me, “Employees walk every customer to a dressing room, ask for their name, and put it on a board. The employee also assesses how many items each customer has so there isn’t any question.”

Lyman also assessed fixtures that were notorious for having inventory disappear. Apparel and gift/impulse items were the two biggest areas of shrink. So instead of placing hair ties in a bowl where they could easily disappear, she put them on a tall dowel, making it more difficult to discreetly slip one into a purse or pocket.

Ongoing Increases in Inventory Management

Lyman’s inventory shrink most recently was about 2%. Not only was that a 50% reduction, but Lyman moved to a new store, nearly triple the size of the old location, and her inventory increased 300%.

She credits those successes to the implementation of practices to reduce administrative errors and customer theft. Better preparation and information sharing with employees results in a more accurate annual physical inventory as well. Lyman also conducts cycle counts and periodic inventories on specific categories, brands or product lines and corrects those discrepancies on an ongoing basis.